The Indian Railways has decided to adopt ‘flexi-pricing’ for some of its premier trains like the Rajdhani and Shatabdi Expresses. The base fare (same as the current fare) would apply for the first 10% of berths, then 10% higher price for the next 10% of berths and so on. Once 60% of berths are booked, the fare would be 1.5 times the base rate and that is the maximum limit on the price.
Thus, if all the berths are booked, 90% of the passengers would end up paying higher fares compared to now. Even if the train leaves with coaches 40% empty, 90% of the passengers would have to pay higher fares. Clearly, this is a device to increase fares through back door. It is thought that since the people have now accepted flexi-pricing for taxi services like Ola/Uber (called ‘surge pricing’) and airlines, they would also find this new pricing rule acceptable.
However, there are several differences between the Indian Railways on the one hand and taxi operators and airlines on the other. Hence, the logic used to justify surge pricing for taxis and airlines would not automatically apply to the Railways.
First, the Railways is a public monopoly. In the case of a taxi operator, there is competition from other taxi operators, autos and public transport systems. So, exorbitant pricing would be kept in check by competition, unlike travel by long-distance trains. Buses are too time-consuming and planes are more expensive.
Hence, Railways becomes a near monopoly within a range of price whose upper bound is set by the lowest fare offered by the budget airlines. Within that price band, Railways has virtual freedom to charge any price it likes by exercising its monopoly power. Also, the price is being decided by the monopolist itself, and not by any regulator, unlike the case of monopoly public utilities in the power sector.
Second, the basic logic behind surge pricing is to have a better match between demand and supply. Suppose, in the middle of the night, five persons are calling for a taxi where there are only two taxis available in the neighbourhood. If the fares remain the same, three persons would have to go without a taxi.
Under surge-pricing, the fare, decided by a pre-set algorithm, immediately goes up. The higher price increases supply by inducing more taxis to come to this area. It also reduces demand as some people would then switch to other alternatives like public transport, autos etc.
People who would not be willing to pay the higher price may still be able to get a taxi at a lower price later by waiting longer. These mechanisms do not work for Railways. Here, a higher fare does not increase the supply of berths. The only adjustment, if any, comes from the demand side. Also, the rise in fares is not reversed later even if some berths remain empty. For airlines, with empty seats, the fare at the last moment may come down drastically.
Third, in the off-season, with trains running partly empty, Railways would have an additional incentive to cut the number of berths. The surge price (with 10% of a smaller number) will kick in early. Instead of reducing prices (as in airlines and taxis), Railways – like a typical monopolist – would reduce supply.
Fourth, there will be a lot of arguments at the ticket counters when a passenger standing ahead gets a similar berth at a lower price. Especially when passengers know that touts make block booking on the very first day the booking opens for a particular journey date.
Advantage touts
Under the new system, the touts will have a greater incentive to corner the first 10% of berths and then resell these at a higher price later. Earlier, the touts ran the risk of getting stranded with unsold tickets if the train ran partially empty. There is no such risk under the new system as passengers, who otherwise have to pay higher than the base price, would find it profitable to buy the ticket from a tout, even if tickets are available at the official counter.
Fifth, if the basic purpose is not to raise price through the back door but to have a flexible pricing scheme, the base price should have been set lower than the current price. The fare would then progressively rise with higher occupancy and may reach the current fare at 40% to 50% occupancy of berths.
In other words, the average fare should roughly remain the same, along with flexible fares as in the airlines where some early birds get a very low price while the late comers pay higher and the last-minute travellers end up paying a very high price (if the plane is almost full) or a very low price (if lots of empty seats). The proposed fare structure in Railways has no such flexibility. The virtue claimed by the officials that the fare scheme is transparent does
not offset the other disadvantages.
Finally, it is doubtful to what extent this would improve the rail finances. The new higher price would apply to only a few premium trains (that too, not for AC First class). A large number of people, if charged 1.5 times the base rate, may prefer to switch to budget airlines. A number of airlines have already announced aggressive plans to woo passengers away from Rajdhani and Shatabdi by reducing fares. As a result, the additional revenue gain for the Railways may not be significant, if not negative, in the longer run.Is this unpopular move worth the trouble? Or, is it a trial balloon? If it gets politically accepted, would the same backdoor attempt to raise fares in other trains be tried later?
(The writer is a former Professor of Economics, IIM-Calcutta)